Things are Not Always What They Seem
At first glance, it appears that the acquisition of another company or merger with another company added to your existing company could produce not only a consolidated bottom line that is larger than yours alone, but could also add considerable value to your company. Even though this is true in most cases, there are instances where it doesn't always work out exactly as planned.

According to The Mergers and Acquisitions Handbook ⁽¹⁾, "In a study of thirty-one acquisitions, we found that most of the stated management motives for making an acquisition were not related to actual performance. Achieving acquisition objectives seems to be a very difficult task; the lure of quick, profitable growth through acquisition does not often materialize regardless of motive. Our overall finding was that there was no important association between post acquisition performance and strategic fit in terms of motives or product line synergy. Given our sample size, we cannot say that strategic fit is of no importance but our study joins others in supporting such a conclusion." In addition, touting savings due to the elimination of overlapping services and the results of combining synergies often fail to materialize.

Integration and Collaboration Are the Keys to Success
The real underlying test of a successful merger or acquisition is usually found in the integration of the companies and how closely they collaborate with each other. One of the most sensitive factors affecting ultimate value creation of a merger or acquisition is the existing corporate culture. Often, the corporate cultures of the acquiring company and the target company do not mesh and cannot be made to mesh. In other cases, the match up is much closer and the integration proceeds more smoothly. A sharing of resources from the acquiring company to the target company tends to build a sense of trust and focus, and retaining some of the key management of the acquired company adds to a smoother transition.

When Acquisitions Do Not Enhance the Bottom Line
We noted earlier that sometimes acquisitions or mergers work and sometimes they do not. How does an acquisition, for example, not work to enhance the bottom line? This happens most often when the acquiring company is only interested in the bottom line and often at the expense of the target company. In these instances, the acquiring company does not invest in many of the target company's projects while at the same time cutting or eliminating projects and/or departments in order to make short-term profits. This is done at the expense of the longer-term development of new products or processes.

Keeping Everyone Informed — Another Key to Success
Let us assume that the acquisition is done properly and is off to a good start. One of the most necessary programs that need to be put in place is an active public relations program. There are always questions from all sides — stockholders, stakeholders, employees, suppliers, customers, etc. The public relations program should be designed to keep these audiences informed with solid information to dispel rumors that surface to fill the vacuum of no information. Such a program should be continually monitored in order to ensure that it is properly answering all of the questions being raised, thus making it an effective communications tool rather than just a showpiece.

Bankrupt Companies — Good Deals or Not?
Another consideration is acquiring a company that is already in bankruptcy. Is it possible to get a better deal from such an acquisition and can you turn a profit in a short period of time? In order to consider any possible opportunities presented by the bankrupt company, it is helpful to understand the basics of Chapter 11. It has the effect of stopping all debts and litigation. During this time, the company is allowed to present a reorganization plan which must then be approved by all affected parties and by the bankruptcy court judge. The process takes approximately 24 months. In order to shorten the reorganization plan time given to a company that files for Chapter 11, often the parties involved will request a bankruptcy auction under Section 363 of the Bankruptcy Code. This is a quick, cost effective manner in which to handle the principal assets. In this case, the judge will allow selected assets, or even the entire company to be sold quickly at auction.

Due Diligence — A Necessity!
Even though a merger or acquisition seems like a good idea at the time, a great deal of due diligence is needed to ensure that the target company is who it says it is, and can do what it says it can do. Acquisitions or mergers that provide instant line extensions may be easier to integrate, from a product standpoint since the distribution channels have been established and all that is necessary in to fill the pipeline. (Please note that this is an over simplification, but for our purposes it serves to make a point.)

The creation of value in the merger/acquisition scenario is obvious. If it all works, certainly there are many opportunities to create value for both the company and its products and services. If the proposed merger and/or acquisition goes badly, not only will new value not be created, but existing value may be adversely impacted. After having performed all of the due diligence successfully, it is possible that a merger or acquisition can add to a consolidated bottom line in a large, and immediate way.

⁽¹⁾

Mergers and Acquisitions Handbook
Alok K. Chakrabarti , Dean and Distinguished Professor,
School of Industrial Management, New Jersey Institute of Technology,
Newark, New Jersey
Edited by Milton L. Rock, Robert A. Rock, and Martin Sikora
ISBN 0-07-0533353-9 Second Edition, McGraw-Hill